Update Country Report Curaçao 20 Dec 2021

Event

In mid-December the government announced upbeat fiscal deficit estimates for 2021, as tax collection has improved on the back of a partial revival in tourism (the island's main economic sector). However, pending a firm rise in tourist arrivals to levels observed before the covid-19 pandemic, the government will have to continue relying on liquidity support from the Netherlands to finance its economic agenda in the 2022-23 forecast period.

Analysis

The government estimates a fiscal deficit of Naf510m (US$285m, or 9.3% of GDP) for 2021, which is below the budget forecast of Naf822m (US$460m). The improvement reflects a strong rebound in tax revenue in the first nine months of the year-tax revenue in the third quarter was 95% higher than in the same quarter in 2019-highlighting improvements from pre-pandemic levels. The government attributed this rise to a recovery in the crucial tourism sector: in January-November tourist arrivals rose by 35% year on year, to 222,715. Although full-year arrivals are still below pre-pandemic levels, the revival is a positive signal for the economy as a whole, given the direct and indirect impact of the industry on revenue and employment.

Curaçao can expect a strong start to 2022 as well, as the traditional tourist high season begins in December and runs until March. Downside risks to this outlook come from the a potential spread of the Omicron variant of covid-19, which could place renewed pressure on the travel industry. However, with 62% of the total population now vaccinated, the government is unlikely to reimpose total shutdown measures, especially given the economic importance of the sector. However, increased restrictions in source markets-particularly the Netherlands-could weigh on arrivals.

With the tourist revival contingent on the evolution of the pandemic, Curaçao will remain dependent on other means of financing its budget. In particular, Dutch liquidity support will serve as an important component of funding in 2022. In this regard, Curaçao's finance minister, Javier Silvania, confirmed in December that nearly half of government organisations had cut benefits by 12.5%-a condition of ongoing liquidity support from the Netherlands.

Impact on the forecast

Although we do not forecast a fiscal deficit for Curaçao, we believe that the island's fiscal woes should ease as its economic recovery gathers steam. An upside risk to the economic recovery and the ensuing fiscal consolidation is the potential for operations to restart at the Isla oil refinery next year.